Question

Wright Oil Company's balance sheet includes three assets: Natural Gas, Oil, and Coal. Suppose Wright Oil Company paid 2.8 million in cash for the right to work a mine with an estimated 100,000 tons of coal. Assume the company paid $60,000 to remove unwanted buildings from the land and $45,000 to prepare the surface for mining. Further, assume that Wright Oil Company signed a $30,000 note payable to a company that will return the land surface to its original condition after the mining ends. During the first year, Wright Oil Company removed 40,000 tons of coal, which is sold on account for $39 per ton. Operating expenses for the first year totaled $252,000, all paid in cash.

1. Record all of Wright Oil Company's transactions, including depletion, for the year.
2. Prepare the company's income statement for its coal operations for the year.

Answer 1

Date	Accounts	Debit	Credit
1.	Coal Mine	$2,800,000
	Bank		$2,800,000
	(To record purchase of coal mine)
2.	Coal Mine(development cost)	$105,000
	Bank		$105,000
	(to record development cost on coal mine)
3.	Accounts Payable	$30,000
	Notes Payable		$30,00
	(signed a notes payable for restoration cost)
4.	Depletion expense	$1,162,000
	Coal mine		$1,162,000
	(To record depletion expense)
5.	Inventory of Coal	$1,174,000
	Depletion expense		$1,174,000
	(To transfer depletion expense to inventory of coal)
6.	Inventory of oil	$252,000
	Operating expenses		$252,000
	(To record operating expenses)
7.	Accounts Receivable	$1,560,000
	Sale		$1,560,000

Calculation of depletion amount :

Initial Cost                                     $2,800,000

Development Cost                       $   105,000

Restoration cost                           $30,000

Depletable Base                           $2,935,000

Divide by estimated Tons                  100,000

Depletion per ton                              $29.35

Depletion expense for the year = 40,000 tons @$29.05

WRIGHT OIL

INCOME STATEMENT

Sales Revenue		$1,560,000
Less: Cost of Goods Sold & Operating expenses		$252,000
Operating Income		$1,308,000
Less: depletion expense		$1,162,000
Earnings before Income Tax		$146,000